Loan Syndication: Syndicated Loan Meaning, Advantages & Procedure explained

Loan syndication meaning

Loan syndication is the process by which a group of lenders typically work together through an intermediary, such as a lead financial institution, syndicate agent, or another party, to organise and manage the transaction, including repayments, fees, etc., to provide financial requirements to a single, large borrower (typically outside the capacity of a single lender), where the division of risk and returns takes place.

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In other words, in loan/bank syndication, many banks work together to make loans to a single borrower, in a scenario where a single bank is unable to handle the borrower’s enormous needs due to risk exposure. Organisations working on large projects that demand significant funding for their business, often need to use this sort of loan/bank syndication method.

Loan syndication advantages

Saves time and effort:

As the arranger handles the bulk of the work involved in the syndication process, the borrower’s time and effort are saved. The borrower meets the lead bank and the arranger then puts in the effort to recruit additional lenders, set up the syndicate process, provide documentation and oversee execution.

Enables large borrowings:

The financing of large borrowings for capital-intensive projects is made possible via the loan syndication procedure. Through this method, governmental or corporate bodies can get borrowings for starting new projects, expanding current ones, enabling mergers and acquisitions, leasing and financing large-scale financial operations.

Flexibility of loan terms:

Since the loan amount is funded by a number of lenders, the loan can be arranged using a variety of loans and securities. Giving the borrower options for fixed or fluctuating interest rates, for example, can give them flexibility. Additionally, the borrower can receive the loan in many currencies to hedge against potential currency risks.

Effective management:

The lead bank oversees the syndication process and ensures that it is carried out as efficiently as possible. As a result, money is managed professionally and within a certain time frame. Additionally, the agent is in charge of ensuring the procedure is carried out and finished.

Positive market reputation:

The fact that the borrower’s loan is being funded by a number of lenders contributes to the borrower’s favourable market perception. Additionally, borrowers with a strong track record of repaying syndicated loans build goodwill with lenders and may find it simpler to get credit facilities.

Competitive rates:

As several lenders are engaged, the borrower receives the best market rate available. The lead bank ensures that the borrower receives the loan at the most affordable rates possible.

See also: Best bank for home loan in 2022

Loan syndication procedure

The borrower starts the loan syndication procedure. The borrower may speak with a single lender at the first pre-mandate stage or request competitive bids from many lenders. The borrower then chooses the lead or arranging bank.
The arranger creates a document known as an information memorandum, once the lead bank is chosen. Transaction terms, investment considerations, an executive summary, an industry overview, a list of terms and conditions, a financial structure, a thorough evaluation of strengths and weaknesses, and risk litigation, are all included in this document.
The arranger then extends invites to additional banks, to take part in the syndication as soon as the aforementioned process is finished. A confidentiality agreement is signed by all parties when the final selection of the participating lenders in the syndication has been made. Documentation for the loan is forwarded to the banks for their assessment and approval after the confidentiality agreement has been signed.
The loan money is disbursed when the loan contract and papers are finalised.
Monitoring is done throughout the last phase using an escrow account. The account where the borrower puts its income is called an escrow account. Before sending payments to any third party, it is the agent’s responsibility to make sure all debts have been repaid, and all statutory obligations have been satisfied. The agent must regularly oversee the lending facility’s activities, as well.

Also read: How safe are home loan borrowers in bank-HFC co-lending?

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